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GOV. Paterson tonight will give a speech on the state’s fiscal crisis – the worst since the ’70s. Mayor Bloomberg said that he read of Paterson’s plans to give the speech with “great enthusiasm,” telling Paterson that he “could not be more right.” And the state’s Financial Control Board, which supervises Gotham’s finances, was about as glum at its annual meeting yesterday. But the situation may well be even worse.

While Paterson, Bloomberg and the state and city comptrollers already have talked lots about upcoming budget deficits, New Yorkers are used to those warnings once or twice a decade, and big numbers are meaningless after a while.

What’s different this time is that the financial industry – the engine of state and city finances – looks to be facing an era of sharply lower profits.

Wall Street’s business model is broken; getting it to work again may take half a decade or more. That could leave New York (city and state) facing a prolonged challenge to rival the city’s near-bankruptcy in the ’70s.

State Comptroller Tom DiNapoli said yesterday that the city enters this downturn “from a position of strength.” Yes, it has substantial surplus funds from previous years. But it hasn’t done much to reform its budget or to reduce its dependence on Wall Street.

Understand: New York (city and state) is acutely, dangerously dependent on the financial industry. Gotham was able to draw on Wall Street to bankroll our recovery from the ’70s crisis because the city, despite its deterioration, managed to remain the nation’s financial capital – and finance soon took off.

The financial industry broke away from the rest of the US economy in the ’80s. As low inflation created a stable environment for financial innovation and a stable currency for the world’s savings, baby boomers and international investors flocked to our markets.

The Dow Jones tripled, and the industry found a huge opportunity in Americans’ growing love of debt, creatively packaging it into everything from mortgage-backed securities to junk bonds and then selling it to investors. Securities firms’ assets more than doubled as a share of US financial assets – and their profits doubled, too.

Meanwhile, other industries had fled New York’s high taxes and miserable quality of life. So, by the late ’80s, financial services contributed nearly 23 percent of all wages and salaries in the city – up more than 60 percent from the previous decade.

Wall Street was luring new money and new people to New York. After hemorrhaging nearly 10 percent of its population in the ’70s, the city gained nearly 4 percent in the ’80s. Its tax take in 1981 had been slightly lower than a decade before – but by ’91, it was raking in a third more.

This cash let New York reverse some of its bone-scraping ’70s budget cuts. In the ’70s, the city laid off nearly 3,000 police officers and 1,500 sanitation workers; in 1985, Mayor Ed Koch hired 5,300 cops and almost 1,000 sanitation workers. And Wall Street’s breakaway ’90s success gave Mayor Rudy Giuliani the financial resources to do the tough work of making New York City safe again.

Under Bloomberg, though, Wall Street pushed the city into unparalleled thriving. The financial industry’s profits as a share of the nation’s income had doubled in the ’80s; by 2006, they’d done so again.

Why? Partly because banks had oodles of money to lend because the growing world continued to send its money to America. The financial world took advantage; it booked high fees by designing ever more complex “structured finance” products, backed by home mortgages as well as corporate loans.

International investors couldn’t get enough of American debt – especially since it was structured so intricately that even risky mortgages were “as safe as government bonds.” And Wall Street was itself borrowing at record levels so that it could take bigger risks with its shareholders’ money.

As banks and financiers got unimaginably rich, so did the city. The financial industry’s contribution to New Yorkers’ wages and salaries topped out at over 35 percent two years ago. Last year, the city took in 41 percent more in taxes than it did in 2000 (after inflation), capping off an era of never-before-seen revenue growth.

Downstate’s ever-increasing wealth was also an immense benefit for Albany. Confident of its ability to rake in cash, the state government this year spent more than a third more than it did a decade ago (adjusted for inflation), according to the Empire Center’s E.J. McMahon.

But the quarter-century-long Wall Street boom may be over. The industry could be entering a wilderness period of lower profits, employment and bonuses. After all, some Wall Street firms would have stopped operating (thanks to their disastrous miscalculations) if the Federal Reserve hadn’t decided to start lending to investment banks after the Bear Stearns meltdown.

It’s not just a matter of getting over the past few years’ huge mistakes. America now faces intense competition (from the euro, for one) for world savings and investment. That could easily shrink the future market for US debt, cutting off a crucial line of Wall Street profits.

Regulators, too, will be harsher. Help from the Fed comes with strings, since taxpayer money is at stake. So investment banks won’t be able to take as many risks – which means lower profits, and not just temporarily.

But the real deal-breaker is the skepticism of Wall Street’s own investors and clients. The most startling news out of this crisis is that Merrill Lynch, UBS and others didn’t realize that they’d taken certain risks for shareholders, lenders and clients until they were already reporting losses in the tens of billions.

Clients and investors accept losses if they understood the risks that they were taking. Not so when a firm has insisted that its careful models and safeguards will protect them – and then it turns out that the only protection from industrywide bankruptcy is Uncle Sam. Investors won’t be trusting Wall Street’s ability to assess and allocate risk anytime soon.

Don’t forget the plain old stock market, either – recent losses there have turned the clock back eight years on the Dow.

New York, so dependent on the financial industry’s continued growth, should shudder. Making this worse: Bloomberg and Govs. George Pataki and Eliot Spitzer used the cash that Wall Street was showering on the city and state not to ease the city’s long-term problems – but to allow them to grow worse.

The city’s tax-funded budget had risen to match the Lindsay-era peak (adjusted for inflation and population) about the time Bloomberg took office six-plus years ago. Now it’s 22 percent above the Lindsay mark. Spending rose just 9 percent or so during the Giuliani era, but has jumped three times as much since – the highest rate since Lindsay left office.

In 1974, under Lindsay, the city devoted a quarter of its budget to social spending: welfare, health services and charities. They soak up the same share today. Nor has New York reformed the pensions and size of its vast public work force or controlled Medicaid and debt costs– and it has let education spending spiral as well. New York state has the same problems, and it’s been less responsible than the city when it comes to budgeting – bad news, since 33 years ago, the city needed the state to save it.

Bottom line: Our elected leaders have been making long-term spending commitments as if Wall Street would never slow for more than a year or two. But the industry now faces its worst crisis in decades. The city and state must drastically change their approach – or this crisis could turn into a longterm disaster.

Tomorrow: What the governor and mayor need to do.

Nicole Gelinas, CFA, is a Manhattan Institute fellow. Adapted from the summer City Journal.